Cash advances can be costly, but if you take care and pay them quickly, they can be an affordable choice for emergency cash.
Thanks to online bank bill-pay services, it is easier to pay off an advance as soon as your paycheck arrives, before costs snowball. And the Credit CARD Act ensures your payment will extinguish the high-interest balance ahead of older, lower-interest transactions.
Credit experts warn that there’s one big asterisk hanging over the strategy: It only works for people who will have the funds to pay back the advance quickly.
“If it is just a short-term stopgap, it might be OK,” says Bruce McClary, vice president of communications for the National Foundation for Credit Counseling. But “you have to attack those high-interest balances with whatever resources you have to clear them off as quickly as possible.”
The costs of a cash advance can mount quickly. The average cash advance APR is near 25 percent, well above the rate for purchases. Fees are typically 5 percent of the advance, with a minimum of $5 to $10. And unlike credit card purchases, there is no grace period on cash advances, so daily interest charges begin piling up immediately.
If you’re careful, however, a cash advance can be comparable to what you might pay for an overdraft loan from your bank. Overdrafts typically carry fees of $35 per instance. People who opt-in for bank overdraft services pay an average of more than $250 a year in fees, a federal study found. Once the service is turned on, users are at risk of overdrafting for multiple purchases by mistake.
There are two keys to keeping a cash advance cheap:
- Pay it off fast. Think days instead of weeks. And don’t even consider months. At 25 percent APR, a $1,000 cash advance will accrue interest of about 70 cents a day. If you can pay it off within a few weeks, the interest won’t have time to add up to much.
- Keep it small. Cards charge fees based on a percentage of the advance. The common fee is 5 percent, with a minimum of $5 or $10. At 5 percent, the most you can get is $100 without going over the $5 minimum fee. If the minimum fee is $10, the most you can borrow without going over the minimum is $200. If you’re pulling the money from an ATM, there will be a fee of a few dollars from the machine as well.
When to consider a cash advance
Why take out cash when you have a credit card? It makes sense to use the card to purchase what you need instead. That way you take advantage of the lower rate on purchases. For a cash advance, “Interest rates and fees are typically much higher than for point-of-sale purchase,” McClary said.
Now that card readers are turning up at outdoor festivals, food trucks and other places that used to be cash-only, it is increasingly easy to pay with plastic.
However, the need for cash may arise in a cash-only private sale such as a yard sale. An expired ATM card while traveling may be solved with a credit card cash advance. Posting bail for yourself or a friend may call for a cash advance, or covering a temporary shortfall in rent. Users of payday loans often cite the need for car repairs – which can usually be covered with a credit card purchase, but may sometimes require a trip to an ATM.
How it works
Getting a cash advance from an ATM is similar to using a bank overdraft to get quick cash. You take your plastic to the cash machine and key in the PIN. If the machine is affiliated with your card network, it dispenses your cash – after you agree to the fees. “Convenience checks” from your card company are also cash advances, which have higher limits than ATM machines.
Behind the scenes, the short-term loans have big differences. With an overdraft, the bank will cover the overdraft with your next deposit. The credit card, however, will let your cash advance balance continue racking up interest until you pay it off. So it is up to you to wipe out the balance and stop the interest from snowballing.
“It’s one thing to use it,” said Nina Heck, credit counseling director at Guidewell Financial Solutions, a nonprofit in Baltimore. “It’s another thing to understand all the consequences.”
Fortunately, a provision of the Credit CARD Act helps extinguish the cash advance quickly. Under the law, amounts you pay over the minimum payment are deducted from the balance with the highest interest rate. So even if you have a purchase balance lingering on the card, the cash advance can be paid off first. In fact, there is no need to wait until the monthly statement arrives – the sooner the payment is made, the sooner interest on the advance is halted.
“Once the minimum payment is met, payments go to the balance with the highest APR,” a U.S. Bank representative said in an email. The bank was one of eight major card issuers asked about how payments are allocated. All said that payments over the minimum go to the highest-interest balance.
One very narrow exception involves a deferred interest balance. Under the federal Credit CARD Act of 2009, these balances, typically linked to a limited time “zero interest” promotion, have priority in the final two months of the deferred interest period.
The other important advantage is the speed with which funds can move into and out of your bank account. At national banks, payroll checks received via direct deposit are supposed to have funds available the next business day following the electronic payment, according to the Office of the Comptroller of the Currency. Similarly, using your bank’s online bill payment system, it should be possible to complete payment of the credit card account within a few business days.
Banks say to allow “several business days” for completion of payments, but offer guidance that the period is one to three days for electronic payments, five to seven days for paper checks.
The interbank ACH payment system (Automated Clearing House) is speeding up payment processing time further. “Starting in September 2016, same-day ACH was initiated,” says Steve Kenneally, an expert on payments systems at the American Bankers Association. Once the program’s rollout is complete in 2018, online banking customers should have the option of completing payments in a single business day. “It’s another tool for consumers to use,” he said.
Costs of a $100 advance
To test the rapid repayment strategy, CreditCards.com researchers took out $100 advances and repaid them via online bank bill payment, using banks other than the ones that issued the credit cards.
- Using a Citi credit card with a 25.74 percent cash advance APR, the $103 advance, which included a $3 ATM fee, was taken out on a Sunday and payment was sent that night via online bill pay. The payment was posted to the account by Citi two days later, on Tuesday. The cost was $10, the minimum for a cash advance, plus 50 cents, representing the minimum interest charge for the account in a billing cycle. Total cost with ATM charge: $13.50.
- Using a Capital One card with 25.15 percent cash advance APR, the $105 advance, including $5 ATM fee, was taken out on a Thursday. Payment via online bill pay went out the following Monday and was posted to the account Tuesday. The cost was the $5 cash advance fee and 50 cents, the minimum interest charge. Total cost with ATM charge: $10.50.
Such small, short-term advances might be a convenience if, for example, an ATM card was expired or unavailable to make a cash withdrawal when expected. For larger amounts and longer terms, the costs of a cash advance will mount quickly.
“If you incur a single incident of this, it may be unavoidable,” says Martin Lynch, director of education at Cambridge Credit Counseling Corp. in Massachusetts. “But if it’s getting to be a regular occurrence, you’re getting way out of touch with your budget.”
See related: ACH network unveils same-day bill pay